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Premium rates for the mandatory third-party motor insurance are likely to rise again as the sector regulator has modified the provisioning norms.

In a recent notification to all non-life insurers, the Insurance Regulatory and Development Authority (Irda) has asked the provisioning (the money non-life insurers have to set aside for meeting high claims) to be raised from 110% of the claims to 210%.

Insurers say the new norms could push up the premium rates for the mandatory cover. Non-life insurance companies will have to provide around Rs 400 crore as additional capital; the hike in provisioning would impact the solvency ratio of some insurers who would be required to infuse additional capital.

As it is, third-party motor insurance is a bleeding portfolio due to higher claims from commercial vehicles. The rates are fixed by Irda and, due to a high claim ratio from commercial vehicles, insurers provide them cover from the declined pool and not from their own books. The size of the declined pool is around R210 crore currently.

Irda last revised the third-party motor insurance premium rates in April. This was the third revision in as many years, with the third-party liability cover for private cars raised by 20%. For two-wheelers, the mandatory cover was raised by 18% and, for commercial vehicles, the increase was around 20%. The overall percentage increase in the third-party motor portfolio was around 19%.

Motor insurance continues to be the largest segment for non-life insurers, supported by the mandatory insurance requirement. Motor insurance constitutes own-damage and third-party insurances. In April 2012, Irda had placed third-party cover under the declined risk insurance pool, which improved claims management and resulted in more equitable pooling of losses among insurers. The upward revision in the premium rates seen in the last few years was needed as claims from this particular segment were rising.

Any vehicle that plies on the road needs a third-party insurance under the Motor Vehicles Act and all insurers have to ensure that the cover is available at their underwriting offices. To arrive at the new third-party motor premium in April, Irda had used data available with the Insurance Information Bureau for the experience period of the underwriting years 2007-08 and 2008-09 for number of policies, number of claims reported and amount of claims paid up to March 31, 2012.

As per the motor vehicles law, the third-party cover is unlimited in case of an accident and the entire compensation has to be paid by the insurer. In case of damage to property, the claim amount can be a maximum of R7.5 lakh. Moreover, litigation related to the claim amount can go on for years in courts. An Irda analysis on the claim development pattern of goods vehicles and passenger vehicles showed that it takes eight years for 99% of claims to be filed.

Prior to 2007, premiums for all non-life sector were regulated by the Tariff Advisory Committee. While regulation of tariffs was withdrawn, it continued in the case of third-party motor insurance, which saw insurers suffering heavy losses. Irda estimates that the insurance premium represents less than 1% of transporters operating costs.

Till March 2012, claims for commercial vehicles were paid from the third-party motor pool. The share of companies in the pool was determined by the market share of the insurance company. The pool was structured in such a way that all insurers would share the losses arising from the provision of third-party cover in proportion to their market share. But from April 1, 2012, Irda created a declined risk pool for liability-only commercial vehicle third-party insurance.

Irda also did an actuarial valuation of the third-party insurance pool and found that the ultimate loss ratio in 2007-08 was 172.3%, which rose to 194.15% in 2009-10. The pool had maintained reserves at 126%, which was insufficient. The regulator made it mandatory for non-life insurers to maintain a solvency ratio of not less than 130% for all lines of business.

Also, after receiving responses from various stakeholders, the regulator found that there was a wide variation in premium changes among various subclasses. It clubbed the subclasses and a flat single revision was done for the vehicle class as a whole.